Question

For the following questions: write a TRUE or FALSE and then elaborate on the answer.

1. The golden-rule state for an economy with constant population but where the effective supply of labour grows at a steady rate refers to a condition such that consumption of the total population is maximised.

2. The equation, Y = MV/P, implies that, if the velocity (V) does not change when the money supply (M) changes, then the government can raise national income (Y) by printing more money (M).

Answer 1

1. False, The golden-rule state for an economy with constant population but where the effective supply of labour grows at a steady rate refers to a condition such that consumption of the total population is maximised. In an economy with a constant population and growing effective supply of labour, the consumption will not be maximised at the steady-state. It will also continue to grow with the rise in the labour supply. It will be maximized when the supply of labour is maximized.

2. False, The equation, Y = MV/P, implies that, if the velocity (V) does not change when the money supply (M) changes, then the government can raise national income (Y) by printing more money (M). If Y = MV/P, then PY = MV . As per this equation, the velocity of money doesn't change and the real GDP (Y) also remains stable. If there is an increase in the money supply by printing more money, only the price level (P) will rise. Inflation will occur. The nominal income may rise, but real income doesn't.